Sarepta Therapeutics, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Sarepta is a commercial-stage biopharmaceutical company focused on RNA-targeted therapeutics, gene therapy and other genetic medicines for rare neuromuscular diseases. The filing covers the unaudited three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Its commercial product is EXONDYS 51 (eteplirsen), approved by the FDA under the accelerated approval pathway for certain Duchenne muscular dystrophy patients.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Product revenue | $78.5 million | $46.0 million | $216.6 million | $97.3 million |
| Operating loss | $(70.1) million | $(45.9) million | $(204.3) million | $(148.5) million |
| Net loss | $(76.4) million | $(47.7) million | $(221.0) million | $(26.7) million |
| Net loss per share | $(1.15) | $(0.78) | $(3.38) | $(0.47) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(266.2) million | $(200.9) million |
- Q3 revenue increased 71%, primarily due to increasing U.S. demand for EXONDYS 51. Nine-month revenue increased 123%.
- Q3 total costs and expenses were $148.6 million, up 62%. Research and development expense increased 153% to $86.6 million, while selling, general and administrative expense increased 88% to $53.0 million.
- Q3 gross margin was approximately 88.6% after cost of sales and amortization of in-licensed rights; nine-month gross margin was approximately 90.0%. The filing does not present a separate adjusted gross margin measure.
- Q3 operating margin was approximately negative 89.3% and net margin was approximately negative 97.3%. Nine-month operating margin was approximately negative 94.3% and net margin approximately negative 102.0%.
- Nine-month cash used in investing activities was $132.8 million, compared with $314.9 million of cash provided in 2017. Financing activities provided $8.9 million, compared with $381.3 million in 2017.
- Cash, cash equivalents and investments totaled approximately $793.9 million at September 30, 2018, including $209.7 million of cash and cash equivalents, $583.2 million of short-term investments and $1.0 million of restricted investment.
- Total assets were $1.183 billion and total stockholders’ equity was $639.8 million. The accumulated deficit was $1.438 billion.
- Net debt carrying value was $415.4 million, consisting primarily of $570.0 million principal amount of 1.50% convertible notes due 2024. The company terminated and repaid its MidCap term loan and revolving credit facilities in September 2018.
Material changes versus the prior comparable periods
- Revenue growth was more than offset by substantially higher research, development, commercial infrastructure and administrative spending.
- Nine-month net loss increased by $194.3 million, largely because 2017 included a $125.0 million gain from the sale of a Priority Review Voucher, while 2018 included higher operating expenses and interest expense.
- Nine-month research and development expense increased by $133.4 million to $255.6 million. The increase included $78.0 million of upfront and milestone payments, including payments related to Myonexus and Lacerta.
- Interest expense increased to $26.5 million for the nine months from $1.3 million, primarily due to the 2024 convertible notes and other debt outstanding during the period.
- Cash and investments declined 27% from December 31, 2017, while short-term investments increased as cash was deployed into marketable securities. Working capital declined 21% to $897.7 million.
- Inventory increased to $115.8 million from $83.6 million, and accounts receivable increased to $48.6 million from $29.5 million. Product revenue reserves increased to $23.2 million from $8.6 million.
- Stock-based compensation increased to $37.3 million for the nine months from $23.1 million.
Guidance, outlook, commentary and risks
- Management stated that cash, cash equivalents and investments were sufficient to fund the current operational plan for at least the next twelve months, but it may seek additional debt or equity financing, government funding, collaborations or licensing transactions.
- The company expects continued significant spending on commercialization of EXONDYS 51, confirmatory and other clinical trials, manufacturing capacity, gene therapy programs, PPMO development and global expansion. It expects to continue incurring operating losses at least through 2018 and cannot predict when profitability or positive operating cash flow will be achieved.
- EXONDYS 51 remains subject to post-marketing requirements and confirmatory trials. Continued U.S. approval may depend on verification of clinical benefit.
- The EMA’s CHMP confirmed a negative opinion for eteplirsen on September 21, 2018; the company expected the European Commission to adopt that opinion by year-end 2018. The company continued market-access and named-patient programs in selected non-U.S. markets.
- Material commitments included approximately $402.1 million of manufacturing obligations, $60.0 million of lease obligations and $622.4 million of convertible debt payments including interest. Additional contingent development, regulatory and commercial milestones and upfront royalties could total up to approximately $289.8 million.
- The Brammer manufacturing agreement required advance, equipment and capacity payments; $35.0 million had been paid by September 30, 2018. Subsequent arrangements with Nationwide Children’s Hospital, Paragon and Lysogene created additional payments and milestone exposure after quarter-end.
- Key risks include dependence on EXONDYS 51 sales and reimbursement, possible failure of confirmatory trials, regulatory setbacks, manufacturing and supply constraints, reliance on third parties, clinical-trial uncertainty, intellectual-property challenges, competition, additional financing needs and potential dilution.
- The Nationwide Children’s micro-dystrophin program had previously been placed on clinical hold because of a trace DNA fragment in research-grade plasmid; the FDA lifted the hold on September 24, 2018, and management did not anticipate a material delay.
Important facts for investors to verify
- Whether EXONDYS 51 sales growth and reimbursement trends are sustainable and sufficient to narrow operating losses.
- Progress, timing and results of EXONDYS 51 confirmatory trials and the effect of the EMA negative opinion.
- Cash burn, future financing requirements and the company’s ability to fund its expanding clinical, manufacturing and business-development commitments.
- Milestone, royalty and manufacturing obligations associated with Myonexus, Lacerta, Brammer, Nationwide Children’s Hospital, Paragon and Lysogene.
- Clinical and regulatory progress for golodirsen, casimersen, SRP-5051 and gene-therapy programs, including the planned golodirsen NDA submission.
- Exposure to customer concentration, as three customers represented 43%, 36% and 18% of nine-month net product revenue.
- The potential dilution and repayment implications of the $570.0 million convertible notes, outstanding equity awards and any future financings.